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Global Economy Still Adrift

Reform is badly needed, not just more stimulus. Spring reviews confirm what is already known—more downgraded growth expectations for 2016 and possibly 2017.

Starting in early February by the Organization of Economic Cooperation and Development, its interim outlook sees only a modest and uneven recovery in advanced economies and slower activity in emerging markets, Yahoo reported.

This was confirmed two months later by OECD’s leading economic indicators—designed to flag turning points in the global economy. They showed the outlook continuing to deteriorate in US and losing steam in Germany. There were signs of stabilization in China, India and France.

By mid-April, World Bank posted similar downgrades, noting that growth in EMs in East Asia and Pacific was holding up despite tough global conditions and slowdown in China. It made significant downgrades for Malaysia to 4.4% (as did Moody’s) and Indonesia to 5.1% in 2016, both commodity exporters; but upgraded Thailand’s growth to 2.5%.

Growth in Asean remains on track at 4.6% this year and 4.8% in 2017-18 (4.4% in 2015). Overall, growth in EMs in EAP will slacken to 6.3% in 2016 and to 6.2% in 2017-18 (from 6.4% previously and 6.5% in 2015). As a group, they accounted for nearly 40% of global growth.

Last week, the International Monetary Fund cut its global forecast for the fourth time in the past year, citing China’s slowdown, persistently low oil prices and chronic weakness in AEs. Growth in China and India remains broadly in line as previously announced, but trade growth has slackened noticeably.

IMF now expects the world economy to grow by 3.2% in 2016 (0.2% from January and against 3.1% in 2015) and forecasts improvement to 3.5% in 2017.

Collective Approach Needed

However, the supervisory 24-member International Monetary and Financial Committee (finance ministers and central banks) concluded on April 16 that nations should “refrain from all forms of protectionism and competitive devaluations, and to allow exchange rates to respond to changing fundamentals... that a more forceful and balanced policy mix was needed to stimulate growth and avoid deflation and emphasized that monetary policy alone will not be enough. Growth-friendly fiscal policy is needed in all countries.”

The Swiss National Bank chairman sums it up best: “This is easier said than done.”

Given significant downside risks posed by financial volatility and high EMs debt, a stronger collective policy approach is urgently needed, focusing on the greater use of fiscal and pro-growth structural reform policies to strengthen growth and reduce financial risks.

The focus should be on policies with strong short-run benefits and on reforms that can also contribute to long-term growth. Indeed, a firm commitment to serious reforms and innovation is vital to boost demand and help support future growth.

Indeed, inflation and growth remain stuck near zero and stock prices have fallen sharply so far this year.

The huge sums invested in biosciences haven’t yielded breakthroughs comparable with antibiotics previously. The human genome was sequenced more than a decade ago. Yet, there is still no approved gene therapy in the market. Yes, quantifying innovation is difficult, especially in an economy that is considered “unevenly innovative.”